Results: Can Xero Limited’s amazing share price run continue?

The Xero Limited (ASX: XRO) share price traded flat at $41.29 this morning, after the company released its annual results for the 2018 financial year. Here’s what you need to know: Revenues rose 38% to $406.6 million (all figures in NZ Dollars) Annualised Monthly Recurring Revenue (AMRR) rose 33% to $484 million Lifetime value per subscriber (LTV) grew 8% to $2,310 Net loss after tax of $27.9 million, down from a loss of $69.1 million in 2017 Positive EBITDA of $26 million for the first time Cash flow positive with $41 million in operating cash flow, compared to an outflow…

To keep reading, enter your email address or login below.

Enter your email below for FREE access to this article and all the content on the site. Also receive Take Stock, The Motley Fool's unique email on what's really happening with the share market. You may unsubscribe any time.

The Xero Limited(ASX: XRO) share price traded flat at $41.29 this morning, after the company released its annual results for the 2018 financial year. Here’s what you need to know:

Revenues rose 38% to $406.6 million (all figures in NZ Dollars)

Annualised Monthly Recurring Revenue (AMRR) rose 33% to $484 million

Lifetime value per subscriber (LTV) grew 8% to $2,310

Net loss after tax of $27.9 million, down from a loss of $69.1 million in 2017

Positive EBITDA of $26 million for the first time

Cash flow positive with $41 million in operating cash flow, compared to an outflow of $4.4 million last year

Gross margin improved 4pts to 81%

Outlook for smaller cash outflow in financial year 2019, Xero expects to manage the business to break-even with no additional funding or debt requirements.

So what?

It was an interesting year for Xero for several reasons, including CEO Rod Drury stepping down and being replaced by Steve Vamos. Xero also experienced a slowing overall rate of growth, with revenue growth of 38% well below the rate of prior years. This is largely due to the increasing size of the business, and slower growth rates in markets like New Zealand and Australia where Xero is already dominant.

The US business is also struggling (compared to the rest), with Xero seemingly finding it hard to gain traction there. UK growth however continues apace:

source: Xero annual report. Click to enlarge; this will also make the image clearer.

Overall the Australian and New Zealand businesses are still the primary drivers of the business. Revenue was up $111 million from last year, with the ANZ region contributing $68 million or 61% of all growth. That will surely taper off at some point due to the small size of this region and the fact that Xero is already dominant here. However, judging by its growth rate there, Xero has cracked the UK market and this is now a larger contributor to earnings than New Zealand.

However, in my opinion, the most important table in today’s presentations is this one:

Source: Company presentations. Clicking will enlarge the image and make it clearer.

You can see that average revenue per user (ARPU; a reflection of what Xero costs) is flat, suggesting Xero may not have increased prices this year. Cost of Acquiring a Customer months (CAC months) reflects how many months it takes to achieve payback of the cost of acquiring that new customer. International growth is far more expensive than domestic growth, although this metric is moving in the right direction. Churn (the number of customers that leave) is also falling, albeit just slightly.

Xero has to keep its customers longer than 8 months (ANZ) or 19 months (internationally) in order to just break-even on that specific customer. As a result the customer experience is paramount and that’s why I feel these metrics are the ones to watch.

Now that it’s grown substantially in size, Xero is unquestionably maturing and I expect the growth to slow from here. However, I continue to believe that it is a high quality business, and I am happy to continue holding my shares.

Financial year 2018 is here and The Motley Fool's dividend detective Andrew Page has revealed his must buy dividend share to grow your wealth in 2018.

You might not know this market leader's name, but it's rapidly expanding into a highly profitable niche market here in Australia. Even better, the shares boast a strong, fully franked dividend that should balloon in the years to come. In other words, we're looking at the holy grail of incredible long-term growth potential AND income you can watch accruing in your account in real time!

Motley Fool contributor Sean O'Neill owns shares of Xero. The Motley Fool Australia owns shares of Xero. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.